Compassion makes for good macroeconomics today, even as the Republicans and Tea Partiers harden their hearts to the damage being done to the poor and unemployed. Raising marginal tax rates on the rich (top 1 percent) and “stinking rich” (as the Slate author terms the top 0.1 percent)—that is, taxing only the portion of their incomes over, say, $300,000 a year—and using the money to fund humanitarian income assistance to the unemployed and their children would put more money into the spending stream than any other fiscal policy measure, as our economy sinks into depression.

Some would say America is already a hollowed-out state, gutted by money interests, powerless to effect such a social contract. I hope they are wrong.

Wednesday, October 20, 2010

The “two party system” is a complete sham, as Carol Quigley pointed out fifty years ago. Republican, Democrat or Tea Party candidates all represent one party, the Money Party.

The most important fiscal policy measure needed today is to raise marginal tax rates on incomes over $1 million to 90 percent, the way they were under Eisenhower. We need to bring our shameless ruling class down to Earth before they decide to start a world war to send our children off to.

The Perfect Storm

It’s a perfect storm. And I’m not talking about the impending dangers facing Democrats. I’m talking about the dangers facing our democracy.

First, income in America is now more concentrated in fewer hands than it’s been in 80 years. Almost a quarter of total income generated in the United States is going to the top 1 percent of Americans.

The top one-tenth of one percent of Americans now earn as much as the bottom 120 million of us. Who are these people? With the exception of a few entrepreneurs like Bill Gates, they’re top executives of big corporations and Wall Street, hedge-fund managers, and private equity managers. They include the Koch brothers, whose wealth increased by billions last year, and who are now funding tea party candidates across the nation.

Which gets us to the second part of the perfect storm. A relatively few Americans are buying our democracy as never before. And they’re doing it completely in secret.

Hundreds of millions of dollars are pouring into advertisements for and against candidates — without a trace of where the dollars are coming from. They’re laundered through a handful of groups. Fred Malek, whom you may remember as deputy director of Richard Nixon’s notorious Committee to Reelect the President (dubbed Creep in the Watergate scandal), is running one of them. Republican operative Karl Rove runs another. The U.S. Chamber of Commerce, a third.

The Supreme Court’s Citizens United vs. the Federal Election Commission made it possible. The Federal Election Commission says only 32 percent of groups paying for election ads are disclosing the names of their donors. By comparison, in the 2006 midterm, 97 percent disclosed; in 2008, almost half disclosed. We’re back to the late 19th century when the lackeys of robber barons literally deposited sacks of cash on the desks of friendly legislators. The public never knew who was bribing whom.

Just before it recessed the House passed a bill that would require that the names of all such donors be publicly disclosed. But it couldn’t get through the Senate. Every Republican voted against it. (To see how far the GOP has come, nearly ten years ago campaign disclosure was supported by 48 of 54 Republican senators.)

Here’s the third part of the perfect storm. Most Americans are in trouble. Their jobs, incomes, savings, and even homes are on the line. They need a government that’s working for them, not for the privileged and the powerful.

Yet their state and local taxes are rising. And their services are being cut. Teachers and firefighters are being laid off. The roads and bridges they count on are crumbling, pipelines are leaking, schools are dilapidated, and public libraries are being shut.

There’s no jobs bill to speak of. No WPA to hire those who can’t find jobs in the private sector. Unemployment insurance doesn’t reach half of the unemployed.

Washington says nothing can be done. There’s no money left.

No money? The marginal income tax rate on the very rich is the lowest it’s been in more than 80 years. Under President Dwight Eisenhower (who no one would have accused of being a radical) it was 91 percent. Now it’s 36 percent. Congress is even fighting over whether to end the temporary Bush tax cut for the rich and return them to the Clinton top tax of 39 percent.

Much of the income of the highest earners is treated as capital gains, anyway — subject to a 15 percent tax. The typical hedge-fund and private-equity manager paid only 17 percent last year. Their earnings were not exactly modest. The top 15 hedge-fund managers earned an average of $1 billion. Congress won’t even return to the estate tax in place during the Clinton administration – which applied only to those in the top 2 percent of incomes.

It won’t limit the tax deductions of the very rich, which include interest payments on multi-million dollar mortgages. (Yet Wall Street refuses to allow homeowners who can’t meet mortgage payments to include their primary residence in personal bankruptcy.)

There’s plenty of money to help stranded Americans, just not the political will to raise it. And at the rate secret money is flooding our political system, even less political will in the future.

The perfect storm: An unprecedented concentration of income and wealth at the top; a record amount of secret money flooding our democracy; and a public becoming increasingly angry and cynical about a government that’s raising its taxes, reducing its services, and unable to get it back to work.

We’re losing our democracy to a different system. It’s called plutocracy.

Tuesday, October 12, 2010

Assuming that the unemployment rate does not materially improve over the next two years, “animal spirits” or confidence levels will fail in about 2013, after the next Presidential election. I premise the lack of improvement in the labor market on the extreme dysfunctionality of the American political system at this historical juncture. At a time when unemployment shows a persistence unprecedented in the postwar business cycle, the Tea Party and Republicans are snookering Americans into seeing government as their “enemy,” which in many ways it may be; but not in the respect that a humane and macro-economically sound government response to human suffering caused by unemployment would be a sensible redistribution of income—now at multigenerational levels of inequality—to those most damaged by the macro economy.

As I have written, the macro economy would be better off if the Bush tax break on households with over $250,000 incomes—some 3 percent of Americans or about 9 million “souls”—were to lapse and the estimated $70 billion annual run rate given to the 15 million officially unemployed person, or less than $5,000 each. The unemployed would spend the money, every penny, and would do more to boost the macro economy than letting the rich keep it.

It is a characteristic of human nature that we get used to things, and judge accordingly. Hence, we speak of “the new normal.” My model suggests that we will forbear the new normal for another couple of years, after which any deterioration in the economy will sink “animal spirits” again. The same qualitative result holds if we see some intermediate improvement in unemployment.

My yield curve plus “animal spirits” recession forecasting model shows virtually no potential for a new collapse in the year ahead (this is not to say the economy is healthy, just that there is little chance of an NBER-type recession ahead, which I identify with a failure of confidence).

The Great Depression saw its financial panic in 1929, its economic bottom in 1933, followed by about seven years of depressed output and employment, followed by war. I do not think we have seen the economic bottom of this cycle, and I believe the financial problems are worse than in the ‘Thirties, when America was the world’s greatest creditor nation. Today we are the world’s greatest debtor nation.

The next great failure of American confidence is likely to be more challenging to the already stretched social fabric than the last one, or the one before it, the Civil War.

Friday, October 8, 2010

Seven o'clock, and retired to my fireside, I have determined to enter into conversation with you; this [Fontainebleau] is a village of about 5,000 inhabitants when the court is not here and 20,000 when they are, occupying a valley thro' which runs a brook, and on each side of it a ridge of small mountains most of which are naked rock. The king comes here in the fall always, to hunt. His court attend him, as do also the foreign diplomatic corps. But as this is not indispensably required, and my finances do not admit the expence of a continued residence here, I propose to come occasionally to attend the king's levees, returning again to Paris, distant 40 miles. This being the first trip, I set out yesterday morning to take a view of the place. For this purpose I shaped my course towards the highest of the mountains in sight, to the top of which was about a league. As soon as I had got clear of the town I fell in with a poor woman walking at the same rate with myself and going the same course. Wishing to know the condition of the labouring poor I entered into conversation with her, which I began by enquiries for the path which would lead me into the mountain: and thence proceeded to enquiries into her vocation, condition and circumstance. She told me she was a day labourer, at 8. sous or 4 d. sterling the day; that she had two children to maintain, and to pay a rent of 30 livres for her house (which would consume the hire of 75 days), that often she could get no emploiment, and of course was without bread. As we had walked together near a mile and she had so far served me as a guide, I gave her, on parting 24 sous. She burst into tears of a gratitude which I could perceive was unfeigned, because she was unable to utter a word. She had probably never before received so great an aid. This little attendrissement, with the solitude of my walk led me into a train of reflections on that unequal division of property which occasions the numberless instances of wretchedness which I had observed in this country and is to be observed all over Europe. The property of this country is absolutely concentered in a very few hands, having revenues of from half a million of guineas a year downwards. These employ the flower of the country as servants, some of them having as many as 200 domestics, not labouring. They employ also a great number of manufacturers, and tradesmen, and lastly the class of labouring husbandmen. But after all these comes the most numerous of all the classes, that is, the poor who cannot find work. I asked myself what could be the reason that so many should be permitted to beg who are willing to work, in a country where there is a very considerable proportion of uncultivated lands? These lands are kept idle mostly for the aske of game. It should seem then that it must be because of the enormous wealth of the proprietors which places them above attention to the increase of their revenues by permitting these lands to be laboured. I am conscious that an equal division of property is impracticable. But the consequences of this enormous inequality producing so much misery to the bulk of mankind, legislators cannot invent too many devices for subdividing property, only taking care to let their subdivisions go hand in hand with the natural affections of the human mind. The descent of property of every kind therefore to all the children, or to all the brothers and sisters, or other relations in equal degree is a politic measure, and a practicable one. Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometrical progression as they rise. Whenever there is in any country, uncultivated lands and unemployed poor, it is clear that the laws of property have been so far extended as to violate natural right. The earth is given as a common stock for man to labour and live on. If, for the encouragement of industry we allow it to be appropriated, we must take care that other employment be furnished to those excluded from the appropriation. If we do not the fundamental right to labour the earth returns to the unemployed. It is too soon yet in our country to say that every man who cannot find employment but who can find uncultivated land, shall be at liberty to cultivate it, paying a moderate rent. But it is not too soon to provide by every possible means that as few as possible shall be without a little portion of land. The small landholders are the most precious part of a state.